By Jonathan Stempel
NEW YORK (Reuters) - Citing "the rare smoking gun," a federal judge said investors may sue five big banks for conspiring to rig prices on hundreds of billions of dollars of bonds issued by mortgage financiers Fannie Mae (PK:FNMA) and Freddie Mac (PK:FMCC) over seven years.
In a Tuesday night decision, U.S. District Judge Jed Rakoff in Manhattan said investors can pursue antitrust claims against Bank of America Corp (N:BAC), BNP Paribas SA (PA:BNPP), Deutsche Bank AG (DE:DBKGn) , Goldman Sachs Group Inc (N:GS) and Morgan Stanley (N:MS).
The judge said chat room transcripts involving those banks' traders were "direct evidence of a conspiracy to fix prices," which investors said caused them to overpay for newly issued bonds between Jan. 1, 2009 and Jan. 1, 2016.
"Here, we have the rare smoking gun," Rakoff wrote. "The chats unmistakably show traders, acting on behalf of those defendants, agreeing to fix prices at a specific level before bringing the bonds to the secondary market."
Rakoff dismissed similar claims against 11 other financial services companies, but said investors may amend those claims.
BNP Paribas and Goldman declined to comment on Wednesday. Bank of America, Deutsche Bank and Morgan Stanley did not immediately respond to requests for comment.
The proposed class action is led by Pennsylvania Treasurer Joe Torsella, a Birmingham, Alabama public pension fund, and electrical workers' retirement and health plans in Dorchester, Massachusetts.
They sued after a report last year said the U.S. Department of Justice was investigating possible bond price-fixing.
The dismissed defendants include Barclays Plc (L:BARC), Cantor Fitzgerald, Citigroup Inc (N:C), Credit Suisse Group AG (S:CSGN), First Horizon National Corp (N:FHN), HSBC Holdings Plc (L:HSBA), JPMorgan Chase & Co (N:JPM), Nomura Holdings Inc (T:8604), Societe Generale SA (PA:SOGN), Toronto-Dominion Bank (TO:TD) and UBS Group AG (S:UBSG).
Christopher Burke, a lawyer for the investors, said they plan to offer chat room evidence to tie those defendants to price-fixing.
According to the complaint, the defendants underwrote $3.97 trillion (£3.23 trillion), or 77.2%, of Fannie Mae and Freddie Mac bonds in the seven-year period, and exploited their dominance by overcharging to secure more profit for themselves.
Evidence included a July 17, 2012 chat where a Deutsche Bank trader told Bank of America, BNP Paribas and Goldman traders that while "anyone can hit any bid," it was better that "we at least try and stay on the same page ... less volatile."
Goldman's trader later said: "If we are free to trade, we cannot talk about prices."
Fannie Mae and Freddie Mac guarantee more than half of U.S. mortgages. They have been in a government conservatorship since a Sept. 2008 bailout.
The case is In re: GSE Bonds Antitrust Litigation, U.S. District Court, Southern (NYSE:SO) District of New York, No. 19-01704.